EXTERNAL ANALYSIS

Abhishek Srivastav

Learning OutcomesAfter studying this topic you should be able to:Understand the role of external analysis in

strategy formulation.

Use a range of tools to analyse an organisation’s external environment.

Explain the limitations of these analytical tools and the role of more subjective analytical approaches.

Link to overall strategic management“Strategic management includes understanding

the strategic position of an organisation, strategic choices for the future and managing strategy in action (Johnson et al., 2008:12).”

Strategic position identifies the impact ofExternal environmentStrategic capabilityExpectation and influence of stakeholders on

strategy

The Business Environment (Johnson et al. 2008: 54)

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The Organisation

External analysis stages

Macro-environment – these are broad trends shaping the national and international environment in terms of political, economic, social and technological trends (i.e. PESTEL factors, key drivers ).

Micro-environment – this is the operating environment or industry sector in which the firm competes. It addresses a range of issues such as suppliers, customers, competitive intensity, threat of new entry and of substitute products arising (i.e. the ‘five-forces’ analysis).

Competitor analysis – seeks to understand the rival offers from other firms seeking to serve the same customers and to out manoeuvre their managers with our innovation and competitive moves.

Market analysis seeks to evaluate the current needs of today’s customers and the emerging needs of tomorrow’s customers so new products can be anticipated. These will be different in different market segments.

Analysing the external environment involves breaking a complex inter-related reality into sets of issues to make the analysis manageable. The main sets of issues are usually:

The Macro-EnvironmentDifficult for the firm to influence

Changes can be far-reaching

The media: rich source of both information and speculation

Tools for analysing the macro-environmentThe PESTEL (Variants PEST/DEEPLIST)

frameworkKey driversScenarios

The PESTEL FrameworkThe PESTEL framework categorises environmental

influences into six main types:Political - EconomicSocio-culturalTechnologicalEnvironmentalLegal

PESTEL analysis evaluates the broad societal trends that affect many industries. It identifies current and future developments that will shape the micro-environments of each industry sector.

Good PESTEL Analysis

Focuses on society wide.Based on sound research of actual

issues. Provides evidence from the research to

validate points made.Future oriented.Interpretive and not descriptive

Major Risk Like the old-fashioned SWOT technique, PESTEL

helps us make listsLists can help us think, but…

A list should be the beginning, not the end of

thinking

Harrison (2003: Ch 2) integrates this with industry

and company analysis

Johnson et al. (2008:55-59) look at the way

PESTEL factors combine…

then at key drivers and trends of business change

Key Drivers and Scenarios Planning

Key drivers for change are environmental factors that are likely to have a high impact on the success or failure of strategy.

Scenarios are detailed and plausible views of how the business environment of an organisation might develop in the future based on key drivers for change about which there is a high level of uncertainty.

Industries and Sectors AnalysisAn industry is a group of firms producing the same

principal product or service.

The industry analysis involves identifyingCompetitive forces Industry life cyclesCompetitive cycles

Porters five forces framework has two main aims:To understand the drivers of competitive behaviour in

the sector and;To evaluate the long-run profit potential of the sector

The Five Forces Framework (Johnson et al. 2008: 60)

Competitive rivalry

Potential entrants

Buyers

Substitutes

Suppliers

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Five forces model – Details

Power of Suppliers

Power of Customers

Substitute

Threats of Potential entrants

Competitive rivalry

• Capital requirements• Differentiation • Switching costs• Access to

supply/distribution channels

• Intellectual property• Expected retaliation• Legislation/Government

action• Economies of scale

• Degree of differentiation• Technological innovation• Price performance relationships

• Size of purchases• Undifferentiated product• Per cent of cost• Low margins (buyer)• Threat of forward

integration• Impact on quality• Price performance is high

• Size of purchases• Differentiation in product• Few substitutes• A few big suppliers• Threat of backward integration

• Competitor balance• Industry growth rate• High fixed costs• High exit barriers• Low differentiation

Evaluation of the Five Force Model

Identifies drivers of competitive behaviour.

Indicates trends in profitability.

Highlights strategies to alter industry structure. (Lynch 2000)

Firms industry environment is a small determinant of that firm’s profitability

Suppliers of complementary products are ignored

Highlights the need to disaggregate broad industry groupings and examine competition at segment or strategic group level Assumes all business relationships are competitive.

Assumes industry boundaries are stable over time, ignoring innovation and entrepreneurship. (Grant 2005)

ADVANTAGES DISADVANTAGES

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The Industry Life Cycle (Johnson et al. 2008: 68)

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Cycles of Competition (Johnson et al. 2008: 69)

Competitors analysisThis involves the analysis of strategic groups,

market segments and strategic customers.

Strategic groupsStrategic groups are organisations within an industry with

similar strategic characteristics, following similar strategies or competing on similar bases.

Benefits identifying strategic group analysisUnderstanding competitionAnalysis of strategic opportunitiesAnalysis of mobility barriers

Strategic Group Analysis (SGA)“A strategic group is the group of firms in an industry following the same or a similar strategy along the strategic dimensions1.”

Porter (1980), p.129.

1. “strategic dimensions” refers to any significant criteria for grouping firms, e.g. segments served, branding, cost position, etc.

Broad

Narrow

National Global

Global full-lineproducers

Global full-lineproducers

National Niche-specialists

National Niche-specialists

High performancesports

High performancesports

RegionalBroad-line

RegionalBroad-line

Luxuryproducers

Luxuryproducers

The key to the strategic group concept is that differences in profitability between groups persists because of the existence of mobility barriers that stop firms entering or moving between groups and thus competing away profit differentials.

ProductRange

GeographicScope

Motor Industry

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Characteristics for Identifying Strategic Groups

Scope of activitiesExtent of product

diversityExtent of geographic

coverageNumber of segments

servedDistribution channels

Resource commitmentExtent of brandingMarketing effortExtent of vertical

integrationProduct qualityTechnological

leadershipOrganisational size

Market Analysis• Determines attractiveness and

competitive advantage • Key variables to determine:

• Overall size• Market shares of key competitors• Growth rates/trends• Segments (relative growth rates)• Profitability• Existing/likely competitors• Accessibility issues

Strategic customer and critical success factors

A strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased.What do our customers want? (basic source of profit in the industry, who

are they, what are their needs and how do they make decisions?)

Critical success factors (CSFs) are those product features with which a organisation must outperform the competition because they are particularly valued by a group of customers. “those factors within the firm’s market environment that determine its

ability to survive and prosper” (Grant 2005, p92)

What does the firm need to do to survive competition? (how intense is competition and what are the key dimensions upon which competitors compete?)

How then can firms use their resources and capabilities to profit from KSF?

Market segment analysisA market segment is a group of customers

who have similar needs that are different from customer needs in other parts of the market.

Market segment analysis

Identify key segmentation variablesConstruct a segmentation matrixAnalyse segment attractivenessIdentify KSFs in each segmentChoose between broad or narrow segment

focus.

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Some Bases of Market Segmentation (Johnson et al. 2008:77)

SummaryExternal analysis involves four main areas:

PESTEL factors, Industry analysis, competitor profiling and market analysis.

The macro-environment can be analysed in terms of PESTEL factors.

Industries and sectors can be analysed using Porter’s Five Forces model.

Industry changes can be analysed through industry life cycle & hypercompetitive models of competition.

The inner layer of the environment can be analysed with strategic group analysis, market and segment analysis.

Reading materialsRequired reading:Johnson et al (2008), chapter 2.

Recommended reading:Porter, M.E. (1980). Competitive

Strategy: Techniques for analysing industries and competitors. Free Press: New York. Chapters 1 & 3

Harvard Business Review (1991). Michael E Porter on Competition and Strategy. Harvard Business Press, pp3-11

 

Assignment Case Study 1Using the data from the case study assignment,

carry out for the tourism industry:

A PESTEL analysis A five force analysis and what do you

conclude? How does the changes in the PESTEL and

five forces impact on TUIWhat are the relative strengths and

weaknesses of the TUI